I have confirmed that you can put an image (photo) in the Header for a Word document and with proper setup it will print first and will be overprinted by text you type later in the body of the document.
My setup:
1. Image "Honthorst_AYoungWomanPlayingAViolaDaGamba.jpg" (happens to be a favorite of mine). Resized to 7.5 x 9.7 inches approximately. Size should not be particularly critical, because when you insert a picture into Word it usually will resize automatically to fit to the page margins.
2. In Photoshop Elements 2, Enhance|Adjust Brightness/Contrast|Brightness and Contrast. I pulled the contrast slider back to about -60, and kicked brightness back up a bit to attempt to "lighten" the image so that text would show on top of it. This is a rather "dark" image, and a different one would probably look better; but she has a nice smile.
3. Open Word and on Page Setup I set: Top Margin -1.0 Left, Right, and Bottom Margins 1.0.
4. Select View|Headers and Footers, and make sure you're in the header.
5. Go to the top toolbar and select Insert|Picture|From File. If the inserted picture is about the right size, you can just insert spaces at the top to run it down to the center of the page.
6. Close the Header/Footer toolbar. With the Top Margin set "negative" the image should flow down onto the body of the page, and you can type directly over it.
Picture settings were only crudely adjusted, since this was just a "proof of concept" thing. There are better ways in Photoshop (any version) to get a better low density image. Text legibility for this test was not too good, and I'd suggest using "light colored" images for better results.
This will, of course, give the same "watermark" on all pages unless you Insert|Break|NextPage to create a new document section - which can have a different header. (Be sure to turn off the "same as previous" link before you insert the new pic for the next section. The link defaults to "on" when you first open the View|Headers and Footers in a new section.)
The "Trace" and "Watermark" methods documented in Word Help quite probably will do more for you than this "brute force" method, but I haven't figured them out yet either.